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Oil refiner to obtain 7 VeraSun ethanol plants

The Valero purchase was one of several deals approved Wednesday by a bankruptcy court in Delaware, which is selling off VeraSun's 16 ethanol plants. The Valero purchase probably attracted the most attention.

Valero is a member in good standing of Big Oil and in the past has been highly critical of the ethanol industry. Oil companies saw the fuel produced from the golden grain as an unwelcome competitor to their black gold. Valero Media Director Bill Day said the company decided to buy the plants because, whether it likes it or not, Valero already is in the ethanol business.

"We have to buy a lot of ethanol to blend into the gasoline to satisfy government mandates," Day said.

Just last year, the CEO of the San Antonio-based company blasted ethanol, blaming it for rising food prices. In a year, that saw food riots in some poorer areas of the world. At the time, Day said the corn-based fuel is a greater threat to world stability than climate change.

Media Director Bill Day now downplays the remark, saying the comment was meant to underscore Valero's opinion that ethanol can not survive without government subsidies. But Day said business considerations trumped Valero's opinion of the corn-based fuel and the company decided to buy the plants.

"There are economic advantages to it and it locks in our supply," he said. "We have a dedicated supply since we're making it ourselves."

Some of that oil industry ethanol will likely be made in southern Minnesota. Included in the Valero purchase is the plant in the town of Welcome. Construction of the plant is complete, but VeraSun couldn't afford to open it. Valero's Bill Day said there's no timetable yet for starting it up. Ethanol supporters seem to be mostly friendly to the Valero purchase, despite the past disputes. Matt Hartwig with the Renewable Fuels Association said the two industry's need each other.

"I think the days of oil and ethanol not mixing are over," Hartwig said. "I think each of us recognizes the importance of the other, to the long-term success of each industry."

Hartwig said a federal government mandate requires that ethanol be blended into gasoline, 10.5 billion gallons of ethanol this year alone. But not everyone believes the entry of an oil company into ethanol will be a smooth transition. Mark Gilman is an oil and gas analyst with The Benchmark Company. He believes Valero's initial assessment may have been right.

"In the past, they had been of a very negative mindset with respect to ethanol and alternate fuels," Gilman said. "And exactly what accounts for this change I'm frankly not sure."

Gilman said Valero would be better off investing $477 million in its oil refineries rather than spending the money on ethanol plants. Gilman said he's suspicious of any industry which depends heavily on government support to survive. The ethanol industry has had tough going lately.

Ethanol has been unprofitable over much of the last year or so. VeraSun went bankrupt after it bet the wrongway on corn prices. The company's second Minnesota plant also was sold on Wednesday. A group of lenders lead by Mankato-based AgStar Financial bought the Janesville plant and several other VeraSun facilities.

In bankruptcy, VeraSun canceled tens of millions of dollars in orders to buy corn. Farmers will be watching Valero to see how it treats the producers who will supply corn to its new ethanol plants. Welcome farmer Bryon Kittleson is hoping Valero will try to generate some good will.

"I don't think they want to alienate the local producer so that they don't have a supply of raw corn product down the road," Kittleson said.

Valero's Bill Day said so far, the company has not decided what it will do with the old corn contracts. It's one of the many difficult decisions the company faces as it becomes a major player in an industry that until now has been the enemy.